TOPIC 3: SOLE PROPRIETORSHIP
3.1. THE CONCEPT OF SOLE PROPRIETORSHIP
MEANING
OF SOLE PROPRIETORSHIP
Sole proprietorship is a business which is owned, managed,
and controlled by one person namely, the sole proprietor. The term ‘sole’ means single, ‘proprietorship’ means the state of
owning a business, and ‘proprietor’
means the owner of a business.
Examples of sole proprietorships are
— small shops,
— salons,
— butchers,
— hawkers,
— restaurants,
— fruits and food vendors
FEATURES
OF SOLE PROPRIETORSHIP
The following are important
features or characteristics of sole proprietorships
1.
Single owner:
Sole proprietorship business is owned and often operated
by one person. In some cases, a sole proprietor may hire trusted employees or
family members.
2.
Flexibility:
The owner can easily change the location, product type,
design or increase the variety of products depending on the customers’ needs.
or even choose to change the type of business. For instance, a sole proprietor
may change from a restaurant to a stationery shop.
3.
No profit and loss sharing:
A
sole proprietor incurs all the benefits and risks
associated with the business. The sole proprietor does not share the profit or
loss gained in the business with anyone else.
4.
Unlimited liability:
There is no legal separation between the owner and the
business. Assets and liabilities of the business belong to the owner. Thus, in
case of loss, the business assets, along with the personal possessions of the
sole proprietor, can be used to settle the business debts.
5.
Start-up capital:
In this type of business the capital is often contributed
or raised by the owner and is usually small. Mostly, the main sources of
capital are from
— personal savings,
— funds from family and friends, and
— loans from micro-finance institutions like Village
Community Banks (VICOBA)
6.
Stability:
Stability and continuity of the sole proprietorship
significantly depend upon the capacity, competence, experience, and life span
of the proprietor. lf the sole proprietor is competent and committed enough to
the business, the business will most likely expand and grow.
7.
Minimal Government Regulation
A
sole proprietorship is that it is subject to fewer
legal and regulatory requirements compared to other business structures like
partnerships and companies. This makes it easier to start and operate.
ADVANTAGES
OF SOLE PROPRIETORSHIP
Advantages of a sole proprietorship
There are advantages of operating as a sole proprietorship. The following are
some of those advantages:
1.
Easy to form a business:
Sole proprietorship is quick and easy to establish as the
decision for set up depends on one person, it requires minimal initial capital
and few legal restrictions.
2.
Quick decision making:
A sole proprietor has the final say in all decisions
regarding the business operations. When a single person makes decisions for the
business there are few unnecessary delays in taking actions.
3.
Independence in decision making:
The sole proprietor is free to make decisions
independently without the interference of others. For example, a sole
proprietor can make any business transactions without seeking approval from
anyone else.
4.
Easy to supervise:
It is easy to supervise a sole proprietorship because
owners usually have close and direct contact with customers and employees.
5.
Small start-up capital:
Sole proprietorships may require a small amount of capital
for start-up. For example, someone setting up a vitumbua business only requires buying cooking ingredients, a
cooking pot and a cooker.
6.
Direct relations with customers:
Since most sole proprietors have close contact with their
customers, they are able to serve and satisfy customers’ needs. They can
receive orders from customers and learn their taste and preferences.
7.
Enjoys all the business profit:
Sole proprietors enjoy all the benefits associated with
the business. They do not share the profit with anybody else. This means sole
proprietors keep all the business profit.
8.
Flexibility in Operations
The business can be quickly adapted to meet changing
market conditions, as the owner has complete control over how the business
runs.
DISADVANTAGES
OF SOLE PROPRIETORSHIP
The following are the disadvantages
of sole proprietorship:
1.
Unlimited liability:
If the business suffers loss, the personal property of the
sole proprietor may be sold to meet the liability if the business assets are
not enough to clear it.
2.
Limited skills:
The business owner may not have all the necessary skills
on financing, marketing, purchasing, producing, and supervising the business
operations. This limits the sole proprietor to perform all duties and functions
efficiently.
3.
Uncertainty in continuity:
The life span of a sole proprietorship is uncertain and
difficult to predict. The sole proprietorship may be closed down or sold when
the proprietor faces challenges such as death, sickness or imprisonment that
may affect supervision of the business.
4.
Working long hours:
As the sole owner and operator of the business, the sole
proprietor is responsible for all aspects of its operation. Thus, sole
proprietors may find themselves working extended hours.
5.
High cost of production:
Being a small business with small scale production, sole
proprietors may not reap the benefit of economies of large scale production.
This may result in a high cost of production. Also, sole proprietors may
6.
Limited Capital
It can be harder to raise large amounts of capital, as the
business relies mainly on the owner’s savings or personal loans and small loans
from small financial institutions.
7.
Difficulty in Expansion
Growing a sole proprietorship into a larger business can
be difficult due to limited access to capital and resources.
8.
Perceived Lack of Credibility
Some clients or suppliers may perceive sole
proprietorships as less reliable or established than corporations or
partnerships
9.
Difficulty Competing with Larger Businesses
Larger companies with more resources can often offer lower
prices, better services, or more sophisticated marketing strategies, making it
hard for sole proprietors to compete effectively.
3.2.
FORMATION OF SOLE PROPRIETORSHIP
Starting a sole proprietorship in
Tanzania is relatively simple and involves a few legal and administrative
steps. Below is a step-by-step guide to set up a sole proprietorship business.
1.
Choose a Business Name and Register It
Choose a unique and suitable name for your business and
register it with the BRELA (Business Registrations and Licensing Agency) to get
a Business
Name Certificate.
2.
Get a Business License
Apply for a Business License. This license is issued by
the Municipal or District Council where your business is located. Once
approved, you will receive your Business License, which must be displayed at
your business premises.
3.
Obtain a Taxpayer Identification Number (TIN)
Every business in Tanzania must be registered for tax
purposes. To do this, you need to apply for a Taxpayer Identification Number
(TIN) from the Tanzania Revenue Authority (TRA). The TIN Certificate allows you
to pay business taxes.
4.
Obtain Additional Permits (If Required)
Depending on the type of business you are starting, you
may need special permits before you begin operations. For example, food-related
businesses need health permits, while manufacturers may require approval from
the Tanzania Bureau of Standards (TBS). Businesses dealing with medicines or
cosmetics need a license from the Tanzania Medicines and Medical Devices
Authority (TMDA).
5.
Open a Business Bank Account (Optional but
Helpful)
Although not mandatory, it is a good idea to open a
separate business bank account. This helps keep your business finances separate
from your personal money, making it easier to track income and expenses. It
also build trust to customers.
6.
Start the Business and Follow Rules
Once you have completed the above steps, you can
officially start your business operations. It is important to keep records of
all transactions, pay taxes on time, and renew your Business License every
year. Following the government rules and regulations.
3.3.
CHALLENGES FACING SOLE PROPRIETORSHIP
The disadvantages of sole proprietorship explained in this
chapter are essentially major challenges that sole proprietors face when
running their businesses.
SOLUTION
TO CHALLENGES FACING SOLE PROPRIETORSHIP
The following are the suggested
ways of solving the challenges encountered by sole proprietors:
1.
Insure the business:
To solve the challenge of unlimited liability that may
result from risks such as fire, it is important for a sole proprietor to insure
the business. This involves the proprietor paying a premium to an insurance
company for coverage against potential risks and losses.
2.
Contractual hiring:
The business owner may hire some experts for help in
various business issues when a need arise. Examples accountant for financial
report preparations.
3.
Succession planning:
If sole proprietors wish the business to continue and
succeed even in their absence they should plan for the succession of the
business. For example, transferring ownership of the business to the next
generation while they are still in charge of the business.
4.
Delegation of some roles:
Sole
proprietors may delegate some of their roles to employees in order to overcome
the habit of overworking themselves. This will help them to dedicate their
efforts in other aspects of business operation.
5.
Expansion of the business:
To enjoy the economies of scale, a sole proprietor needs
to expand its business. The fund for expanding the business may be obtained
through micro-financing. This will help to reduce operating costs and generate
more profits
6.
Attending business training
The sole proprietor can attend business training, take
Online courses, or hire professionals like accountants and marketing experts.
Networking with business associations and mentors can provide valuable
knowledge and guidance.
7.
Seeking further capital
The sole proprietor can seek small business loans,
government grants, or microfinance options to increase capital. Attracting
investors or business partners can also help raise funds.
8.
Building trust
Sole proprietors can build trust by registering the
business legally, maintaining good financial records, and offering high-quality
services. Getting certifications or industry recognition can also enhance
credibility.
